Theory of the Firm
-Privately owned firms are motivated by profit
-Total Profit = total revenue - total cost
-TR-TC Production Function
-land+labor+capital+entrepreneurship = output/product
-short run: at least one factor cannot be changed
-long run: all factors can be changed
Law of Diminishing Returns
-In the short run, at least one factor is fixed and at least another is variable
-To increase output, the variable factor can be increased
-each additional unit = less and less of the fixed factor to work with.
-Law of Diminishing Returns: If some factors of production are fixed while one or some other factors are increased, then some point of additional output for each additional variable will decrease.
Revenue Theory Total Product, Average Product, Marginal Product Total Product (TP) = total quantity of a particular good/service Average Product (AP) = TP/(units of factor input) Marginal Product (MP) = ∆TP/∆factor input
Short Run Costs Total Cost = Total Fixed Cost + Total Variable Cost (TFC+TVC)
TFC doesn't change with output, TVC changes with output Average Fixed Cost (AFC) = TFC/Q Average Variable Cost (AVC) = TVC/Q Average Total Cost (ATC) = T
If MP>AP, AP increasing, + vise versa
When MP at max, MC at min
When MP crosses AP, MC crosses AVC
Revenue curves and output
Revenue when price does not change with output: PED =perfectly inelastic
Revenue when price falls as output increases with output: PED = elastic
Profit Accounting Profit: the difference between total revenues and total explicit costs Explicit costs: costs that have money value Economic profit: the difference between total revenues and the explicit costs and opportunity cost of all factors of production
When inputs are increased in the long run, the output may:
-increase more than proportionately ("economies of scale"/"increasing returns to scale")
-economies of scale, constant returns to scale, diseconomies of scale
-economies of scale:
-specialization
division of labor
-bulk buying
-financial economies
-transport economies
-promotional economies
-diseconomies of scale:
-control and communication problems
-alienation/loss of identity -Key situations
-Shut-down price
-Occurs when P = AVC
-At any price below this, firm should shut down
-will not lose variable costs
-Break-even Price
-Occurs when P = ATC
-At this price, the firm is covering all costs (including opportunity)
-normal economic profit
-Profit-maximizing level
-Occurs when MR = MC
-If MR > MC, increase output
-Privately owned firms are motivated by profit
-Total Profit = total revenue - total cost
-TR-TC
Production Function
-land+labor+capital+entrepreneurship = output/product
-short run: at least one factor cannot be changed
-long run: all factors can be changed
Law of Diminishing Returns
-In the short run, at least one factor is fixed and at least another is variable
-To increase output, the variable factor can be increased
-each additional unit = less and less of the fixed factor to work with.
-Law of Diminishing Returns: If some factors of production are fixed while one or some other factors are increased, then some point of additional output for each additional variable will decrease.
Revenue Theory
Total Product, Average Product, Marginal Product
Total Product (TP) = total quantity of a particular good/service
Average Product (AP) = TP/(units of factor input)
Marginal Product (MP) = ∆TP/∆factor input
Short Run Costs
Total Cost = Total Fixed Cost + Total Variable Cost (TFC+TVC)
TFC doesn't change with output, TVC changes with output
Average Fixed Cost (AFC) = TFC/Q
Average Variable Cost (AVC) = TVC/Q
Average Total Cost (ATC) = T
If MP>AP, AP increasing, + vise versa
When MP at max, MC at min
When MP crosses AP, MC crosses AVC
Revenue curves and output
Profit
Accounting Profit: the difference between total revenues and total explicit costs
Explicit costs: costs that have money value
Economic profit: the difference between total revenues and the explicit costs and opportunity cost of all factors of production
When inputs are increased in the long run, the output may:
-increase more than proportionately ("economies of scale"/"increasing returns to scale")
-economies of scale, constant returns to scale, diseconomies of scale
-economies of scale:
-specialization
division of labor
-bulk buying
-financial economies
-transport economies
-promotional economies
-diseconomies of scale:
-control and communication problems
-alienation/loss of identity
-Key situations
-Shut-down price
-Occurs when P = AVC
-At any price below this, firm should shut down
-will not lose variable costs
-Break-even Price
-Occurs when P = ATC
-At this price, the firm is covering all costs (including opportunity)
-normal economic profit
-Profit-maximizing level
-Occurs when MR = MC
-If MR > MC, increase output